Chinese economic growth might never fully return After COVID

In recent years, many nations have had to strike a delicate balance between safeguarding their citizens from COVID and maintaining a thriving economy. Students and professionals in China are growing impatient with the country’s zero-COVID policy, one of the strictest approaches in the world to combating the virus. The deaths of ten individuals in an apartment building fire in Ürümchi, Xinjiang in November served as the impetus for recent sporadic protests around China.

Even though there are indications that restrictions are beginning to loosen nationwide, the impact on the economy won’t be as clear-cut as the Chinese government might have hoped.

The problem for China is that the country’s zero-COVID policy, which guarantees its residents’ protection from the virus, has resulted in a sizable portion of the population being unvaccinated. No government wants to admit it could have made a mistake, but doing so is crucial for the legitimacy of the social contract between the Chinese Communist Party and its constituents. In exchange for absolute authority, the authorities promise social and economic security as well as the freedom to amass wealth.

However, China’s social contract is beginning to fall apart as a result of slowing GDP development, rising graduate unemployment (underemployment surpassed 20% in July), and mounting economic suffering.

China’s government makes decisions

Making decisions swiftly in emergency situations is a benefit of authoritarian government. In response to the global financial crisis of 2008, the Chinese government moved swiftly to implement a 4 trillion yuan (£470 billion) fiscal plan. The economy expanded by 8.7% in 2009 and over 10% in 2010, following a severe decline in GDP in 2008. The growth rate eventually stabilized at a healthy but manageable 6.8%.

After the initial misunderstanding regarding the pandemic’s origin and allocation of responsibility, the government moved quickly to lock down the economy and flatten the curve. As a result, only 5,233 COVID deaths—as opposed to 1.1 million in the US—had been documented as of December 2022.

On November 30, 2022, however, there were 37,828 daily COVID instances in China. This is higher than the high point in April, when Shanghai was placed under an economically crippling lockdown. Additionally, GDP decreased by 2.6% in the second quarter of this year before rising by 3.6% in the third.

Therefore, it is obvious that a trade-off must be made between the advantages to vulnerable populations’ health and the policy’s economic and social costs. As a result, it’s crucial to weigh both the immediate costs of the lockout and any potential long-term effects.

The interruption of industry and worldwide supply chains has had the most direct impacts, but the domestic service sector has also been particularly hard struck. The graph below demonstrates how economic growth changed from a consistent quarterly rate of 1.7% after the global financial crisis of 2008 to a collapse and recovery in 2020 and a second downturn in quarter two of 2022.

Data from the Chinese National Bureau of Statistics.

The uncertainty brought on by policy changes, which has impacted both local and international investment and disrupted supply chains, is likely to have a long-term economic impact. According to my estimates utilizing Federal Reserve Economic Data (FRED) and demographic data from the World Bank, real GDP per capita in China is expected to increase at a rate of 6.3% annually, which would result in a staggering 72% loss of output over the long future as compared to 2018 GDP.

For the Chinese economy, this represents a sizable loss, and studies suggest that output losses of this magnitude are rarely reversed over the long run. Foreign companies are reviewing their supply chain agreements, and the crucial human capital that foreign workers provided to China has been leaving. The pandemic may result in a new, slower trend growth rate that won’t be apparent for some time, similar to what happened after the financial crisis.

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